In spite of it all, investors still love Wells Fargo

The educational portion of this newsletter focuses on the global chip shortage

Source: Instagram

In under 4 minutes, you will learn:

  • The global chip shortage explained
  • 5 headlines that pretty much sum up the week
  • Different ways Biden and Trump are challenging Big Tech
  • Our rec of the week

The global chip shortage in a nutshell

TL;DR

  • Before the pandemic, many companies did not order enough microchips which led to a global shortage
  • Automobiles have been impacted significantly because a single car does not need one chip to operate – it needs ~1,000
  • Analysts expect the shortage to die down by the end of the year
  • Businesses are starting to over-order for good measure
  • It’s not the most opportune time to invest in semiconductors, but there is definitely money to be made

In the early months of 2020, cleaning supplies, masks, and computers were in high demand. On the other hand, the automobile industry saw demand plummet so far that manufacturers canceled or paused future orders of microchips.

As a result, fabs (chip manufacturers) shifted output to address the surging clamor for consumer electronics. Employees and employers found themselves ordering webcams and laptops galore; schools switched to a variety of virtual learning models; and the exponential innovation of cloud computing and the 5G rollout meant that the tech industry suddenly had the stomach to snap up chips – and a spot in the production line – that automakers no longer needed. 

By the time 2020 came to a close, vehicle manufacturers realized the mistake they’d made. In particular, three problems arose:

  1. Since production lines had shifted to tech, automakers found themselves at the back of the line to nab even a few microchips
  2. Most modern vehicles require around 1,000 chips apiece to function fully. These chips do everything from aiding internal and external lighting and battery management to making emergency braking, automatic windows, and seat control possible.
  3. Automotive semiconductor technology is outdated by more than 15 years – which means automakers either need to invest in upgrading their technology, or foundries need to build more legacy chips

Automakers: stuck between a rock and a hard place

Though the auto industry orders $39.5 billion worth of chips every year, it makes up less than 9% of total demand by revenue. Not to mention, each chip only generates a fraction of the profits of in-demand high-speed processors. 

Because these chips are larger and less efficient than the tiny, high-speed processors on which your phone and laptop rely, there’s no way for the industry to repurpose and repackage them for other customers. these chips are necessary for the auto industry – and by extension, consumers. But there’s limited incentive for chipmakers to actually address the problem.

Source: MiNews

Analysts seem to agree that the most problematic shortages will ease up by the end of the year. However, it may spend the bulk of 2022 working their way through the supply chain to end up in end-user products.

And unfortunately, many industries appear to be engaged in the institutional equivalent of panic-buying toilet paper: double-ordering chips to bolster their industry against future chip shortages. And while that may protect them in the long run, it also serves to make the short-term shortage that much worse. 

How has the chip shortage impacted business?

To help address the chip shortage, legendary chipmaker Intel announced in March that it would invest $20 billion into two new Arizona factories to expand its newest offering, Intel Foundry Services. And while this will give the microchip industry (particularly in North America) a much-needed boost, the factory won’t be producing for years yet. 

Until then, it seems like the current problem will remain a problem. The impact? A lack of chips is expected to lower global vehicle output by 3.9 million units in 2021 alone. And between vehicle production issues and model shortages, the global automotive industry is likely to suffer around $110 billion in lost revenue

Ford alone expects to see Q2 vehicle production cut by 50%, with the full year forecast short 1.1 million units and roughly $2.5 billion in earnings. To compensate for projected losses, Ford is slashing North American vehicle production at six U.S. plants through at least August. Other carmakers are reportedly skimping on premium features like extra screens and navigation systems to extend their chip supplies as far as possible. 

Models taken out of production number in the millions (as of May 2021)

Source: PC Mag

But it’s not just the auto industry. 

Chipmaker Nvidia has already set about repurposing old GPUs into special cryptocurrency mining boards to free up supplies for new gaming technologies. 

John Deere is projecting shortages lasting up to 18 months for their factories, setting back farm equipment needs at least two years. 

Apple noted in its second quarter earnings report that it’s having issues “licensing [the] legacy nodes” it needs for current and upcoming projects. 

And both China and Japan have reported industrial output delays and reductions as a result of the chip shortage – especially in the automotive industry. 

How to Invest in Semiconductors

If ever there was a time to invest in the semiconductor industry…well, frankly, that was when the market crashed in 2020. But if you’re ready to hop aboard now, you can get started investing in individual companies at every step in the supply chain process, as well as funds that capitalize on various segments of the sector. 

For instance, you may choose to invest in the iShares PHLX Semiconductor ETF, which tracks the PHLX Semiconductor Index, the benchmark for the semiconductor industry.

Five-year performance of iShares PHLX Semiconductor ETF (PHLX)

Source: Google Finance

Alternatively, the Invesco Dynamic Semiconductors ETF tracks only U.S.-based small- and mid-cap funds; while the First Trust Nasdaq Semiconductor ETF tracks only liquid semiconductor companies with an emphasis on growth; and the VanEck Vectors Semiconductor ETF tracks 25 semiconductor chip companies around the globe.

The bottom line

While there is not much that can be done about the chip shortage, the market has grown exponentially and is expected to continue despite its current shortcomings.

Semiconductor market size worldwide from 1987 to 2022

Source: Statista

Wherever you choose to invest, remember that the sector is highly cyclical, based on boom-and-bust cycles driven by underlying demand. When demand is high, profit margins skyrocket – and when the bottom falls out of the market, chip prices fall and domino down the supply chain. 

And because semiconductor companies fund massive research and development budgets, their expenses may ultimately cut into your potential profits…even if the chips they create don’t pay off in the end. 

Read the full Investing 101 article to learn about the semiconductor industry, its history and why it’s so crucial for many businesses

Read More

Five headlines that sum up the week

1. Wells Fargo abruptly pulls personal lines of credit for customers

At this point, should this be their company tagline? (Giphy)

What’s worse is that its FAQs suggest that account closures will impact credit scores.  Customers were originally pitched the ideal of being able to borrow $3,000 to $100,000 to consolidate higher-interest credit card debt, pay for home renovations or avoid overdraft fees of linked checking accounts. That entire product has been nixed out of the blue by Wells Fargo. Amid all of the scandal and compliance issues (as well as being compared to the Mafia last week), is this really surprising?

2. The Pentagon cancels the JEDI program contract

To our disappointment, we don’t have Jedi’s in America (Giphy)

The JEDI (aka Joint Enterprise Defense Infrastructure) Program, a massive cloud computing project, was called off by the Pentagon due to technical reasons. This might be due to Amazon’s relentless threats of “years of litigation” because they felt it was uncool that they weren’t selected over Microsoft. A new program is being introduced in its place. While it’s not as aptly named as JEDI, the Joint Warfighter Cloud Capability is open to all bidders, including Microsoft, Amazon, Google, Oracle and IBM. 

3. 36 states are suing Google over antitrust practices in the Google Play Store

Source: Twitter

This just in: everyone and their mom is suing Google. 36 states, led by Utah, announced a lawsuit against Alphabet’s Google over its Google Play app store. The word “monopoly” was uttered at least once during the filing. The suit claims that Google uses its Android operating system to limit competition through contracts, technical barriers and other nefarious means. Google response, broadcasted via blog posts, states: “It’s strange that a group of state attorneys general chose to file a lawsuit attacking a system that provides more openness and choice than others.”

4. Softbank Invests in Israeli facial recognition startup

Source: Finances Online

Softbank just invested $235 million in AnyVision Interactive Technologies, an Israeli startup that plans to expand in the U.S. This is the same company that Microsoft was an early investor in. However, the company sold its stake citing “the challenges of being a minority investor in a company that sells sensitive technology.” This has been consistent with many U.S. tech companies – because, for obvious reasons, facial recognition technology is highly unpopular. The Softbank investment has increased the valuation of AnyVision to over $1 billion.

5. Amazon signs a movie licensing deal with Universal

Amazon was already spending the most on film licensing prior to this deal (Reelgood)

Amazon Prime & IMDb TV has signed a deal with Comcast’s Universal Pictures to add its movies to Amazon’s platforms. The deals includes specific terms regarding new films from Universal. For the first four months of a release, the films will be shown exclusively on Comcast’s Peacock streaming service, then on Amazon for 10 months. After that period, it will return to Peacock for another four months. This deal excludes animated films – so if you’re expecting to see Puss in Boots on Amazon, you will need to go to Peacock for that. According to the WSJ, Universal expects to earn around $2 billion a year from the deal.

Yesterday’s v1.7 Q.ai app release has some major, exciting changes:

  • Community: Now you can interact with this community straight from the app thanks to the Community tab
  • Exclusive strategy unlockable: All you have to do is invite 3 friends to the app (which helps them bypass the 60k person waitlist) and you’ll unlock an exclusive strategy!
  • Personalized dashboard: View historical data, modify your kits, and more. Because this investing app is all about what you want to get out of it.
  • Access our FAQs: Without even leaving the app! Full access to our Learning Center and Knowledge Base, located in settings.

ICYMI: U.S. Presidents – both current and former – are taking a stance against Big Tech

Their stances” couldn’t be more different. President Biden has remained consistent with much of the what we’re hearing in the news lately regarding Big Tech and all the antitrust lawsuits they’ve been wrapped up in. 

He is expected to sign an executive order today that focuses on mergers, particularly how big tech companies are able to grow through acquisitions while gaining a competitive advantage through the additional consumer data it has access to.

The FTC and FCC are called out specifically. The FTC has been encouraged to write rules that limit how consumer data is used. This could lead to antitrust laws being rewritten to better address the business models of these companies. The order also asks that the FCC adopt new restrictions on broadband internet providers’ practices – citing activists who argue that consumers don’t have enough choices and pay too much money for internet services. 

Since the FCC and FTC are independent agencies, the reach of this executive order has its limitations. But, considering that the laws have barely changed since the adoption of the Internet, it makes sense why there is pressure to update these laws.

As for former President Donald Trump, he is suing big tech companies over the ban of his social media accounts. The lawsuit alleges that the First Amendment rights are being compromised by the platforms and that he is being censored. Trump also claims he was banned from the companies’ platforms for “exercising his constitutional right of free speech.” Mr. Trump has made it a habit to complain about these social media platforms and how he has been unfairly treated by them, something he had done for years. This lawsuit is not a surprise given his relationship with them. 

Crypto Scammers Rip Off Billions as Pump-and-Dump Schemes Go Digital (via Bloomberg)

Source: Bloomberg

Where there’s money there are scams. Despite crypto being touted as decentralized, secure and untraceable, there are countless ponzi schemes and scams that people are falling for. Total losses are in the billions. This Bloomberg article takes you on a journey through these elaborate scams and how it’s gotten so out of hand a market was created for sites like tokensniffer.com.